How does life insurance work?

How does life insurance work?

Life insurance operates in the same way that all insurance policies do. You are out to protect something when you get insurance, in this case, it is to safeguard the life of your loved ones in case you are not there. There are those people who rely on you while you are alive and are a responsible citizen in society; however, when you are deceased, those who depend on you will be reliant on you. Therefore, it is imperative that they know they can still do the same while you are not around. This is the main reason people take life insurance policies.

Here is how your dependents will benefit:

  • A lump sum form of payment given to your dependents when you are deceased; this helps cater for the needs that you once provided for them.
  • By gaining this amount, your dependants will be able to receive an amount that is equal to your monthly paycheck while you were still alive.
  • They will leave the comfortable life that you always aspired in case you are no longer alive.
  • Your spouse would be comfortable when handling the needs of your children if you had them before your demise.
  • You will have left a legacy of a hard working citizen whose family does not have to depend on others once you are gone.
  • You have the peace of mind when paying the premiums as they guarantee not just your future but also the future of your loved ones.

There are different types of insurance policies that you can enlist. Consider all variables from the policy that you choose. Your adviser will give you this type of advice when getting life insurance once you decide to take up one.

Here are some variables to consider

Is it reliable?

You need to know that the amount you accept on for the cover will be paid to your dependents once you are deceased. To ensure that this will be the case, pay for the agreed amount every month as well as each year according to the agreed terms.

Naturally, this is the main stipulation that ensures that the spouses agree and one party will ensure the children get a comfortable life the parents always wanted. Else, there is no claim on the life cover. You are betting on the fact that paying the life insurance does not guarantee that you are the one who claims. As such, it is a significant bet on the reliability of the insurance company in case you happen to pass on or your spouse does so in kind.

Life insurance cost

Essentially, a host of factors dictates how much you pay in premiums determining the cost of the premium paid on the insurance policy. They include the following.

  • Age
  • Height
  • Weight
  • Health
  • Occupation

The price is fixed for the duration that you wish to pay the premiums and will remain as such unless you want to change the terms regarding increasing length of your cover or the amount payable in premiums.

Independent adviser

It is important to get special advisers as opposed to getting advice from an insurance agent from a particular company that will provide information that is geared towards getting a commission from your cover. Gain information that will look into the variables to ensure that you suit the needs of the cover you want for your loved ones.

There are various types of insurance. The most common are Term life insurance and Whole of life insurance.

  • Term life insurance: This is set for a certain number of years. In case you die in 30 years, and you had set your date of demise for that age, your family will get the lump sum agreed. All you need to do is make your payment from that time. However, if you outlive the said period, your policy does not give you coverage after this. It is a cheaper form of coverage compared to whole life insurance.
  • Whole life insurance: There is no expiry date for this type of life insurance policy. The cover remains as long as you pay the required premiums until your unfortunate demise. As expected, the premiums are higher, and there is a payment that is guaranteed before your demise. However, the premiums you pay for this type of policy are reviewable. You can change them based on your age. However, you need to ensure that you cancel it before you are unable to pay your premiums. You need to switch to a fixed price based on the ability to afford if you know that you may not pay premiums after, say, retirement.

How it works for the insurance companies

Insurance companies need to make money. As such, when you need a life insurance policy for € 500,000 or €1,000,000 or more, the insurance company will make money by determining and assessing probabilities of such an eventuality. In the case of a term life insurance, the company wins if you outlive the stipulated age of maturity, as they do not pay out the policy.

The company is investing in the premiums paid by clients.

Overall, money paid out after a claim is less than what you deposit following the agreed terms of life insurance policy taken. Nonetheless, even if the insurance company gains more through the pooling from life insurance policy owners and investing ensure you seek a policy that will protect your family in the sad eventuality that you are no longer there.